Crude Oil Is Trapped In A Bear Raid; Not Its Fundamentals [View article]

"Safety" on the investment highway is entirely-based on what you are driving and when something occurs. The more steel, the safer you are before an accident.

But after a big "highway" accident - and after everything has been cleared away - all the cars drive will drive away - beginning (of course) from a standstill - at a different pace (units of distance traveled per unit of time).

For our analogy, the Big trucks (majors) lumber out slowly and steadily; and you will surely get to your destination safely and well-protected in that big truck. But you will get there twice as fast in a small to mid cap car. And in a leveraged fund? You will get there at Ferrari-speed.

TIME carries all the muscle. How much happens in what space of time. And there is an odd corollary to this too: by the "time" it looks good, you're too late.

That is why I dollar-cost average at the beginning point (and we are into this trade a full month now), based on my view of the fundamentals and technical patterns I see repeating.

Since the "when", the TIME is all-important (in terms of productivity $), my first consideration is to get that to work for me instead of against me.

I would say the entire human endeavor is based on what we do with TIME - the currency we have been given in this life, and it is the single most important thing in investing too.

Long-term? I don't know about that one. But production ($) per unit of TIME - I can wrap my head around that one easily. And if we are to drive away from this once-in-a-blue-moon oil debacle, I want to be in the first car and the fastest car heading onto an extremely uncrowded highway.

That's GASL, or something like LINE, NDRO, GDP, CRK, UPL, or MEMP. The value of BNO is it tells you how far you have to go before you get "there".

And check out this page on the LINE website: http://bit.ly/wuLewg. While on that page, click on "Is LINN Energy a Master Limited Partnership (MLP) or a corporation?" You will notice that it has a unique tax-deferred status as a neo-MLP, which is perfect for investors in a taxable account.

In sum, there were financial questions (that had suddenly surrounded the company) "fixed" by a quick liquidating of assets to raise cash and pay down debt.

They also announced a 50% reduction in the dividend. Up until Dec 1, the dividend was not a problem. It had a been a reasonable 10% or so. But when the stock was cut in half, and then by another third, it was prudent they took action, which they did.

Remember, all this rapid card-shuffling took place in a matter of weeks. They also - in the near term only (2015) - have outsourced the financing of their new drilling projects to a hedge fund in exchange for 15% of the profits.

So on several fronts, they slashed their costs, raised cash, out-sourced the financing of near term drilling, and kept enough cash in their profile to take advantage of "stressed-asset sale" opportunities with other small oil producers if such assets became available in a fire sale.

Going forward? The stock is now near financial-crisis lows; oil has gone down 10% since January 1 and yet LINE is up 10% in the same time frame. As an investor, I get a rock-solid distribution of 10c/share per month (that I can reinvest in LINE shares); a likely capital gain in the next year or two, and yes, if profits return - an increase in the distribution.

That's a lot to like, and I think investors feel the downside is limited and the upside is substantial. On a technical basis, it made a perfect double bottom (almost to the penny) last week, and traded the most shares in the company's history on that day, in which it rose almost 30% off its lows in a single day.

I've watched LINE and NDRO carefully. Thus far, they have not been affected by the new Jan 1 downturn in crude oil. Another one to look at is BBG (down 7% today) which has one of the most complete hedge-books in the industry. Almost all of its production is hedged at $90. At $9.19, it would be a great ticker to sell puts on.

Crude Oil Is Trapped In A Bear Raid; Not Its Fundamentals [View article]

It's felt like that from the beginning. One wonders how many oil companies are short their own stock and production to protect themselves? That could be pushing the price down too.

Have you heard Helene Meisler's quip (she's the tech analyst for the street.com). "By the time it looks good, you're too late."

I think the oil market has moved beyond panic. It's now resigned despair: like waiting your turn in the prison yard for a post at the firing-squad. My question: WHO are the counterparties to these hedges worth millions of barrels of shale oil at $95/bbl? Any chance they are like the mortgage insurers of yore? They must be on the hook for a half-trillion in hedge money.

I wrote an article recently that highlighted the cost of oil per ounce of gold. (see: http://bit.ly/1BIehTi)

This was today's update: "Tuesday, January 6, 2015 - 3:30 PM (Pacific Time). Gold rose today to $1219/oz and Crude oil fell to $47.50. How many barrels of oil can you buy today for an ounce of gold? 25.67 barrels, or 5 more barrels than a month ago. To put it in perspective - relative to the oil/gold ratio mentioned in the article (above) - there has been only ONE other time in the past 70 years where you could buy that many barrels of oil for an ounce of gold - 1986/87 - the lowest tape on record. At these levels, I have to think that we are close to a bottom in crude oil."

Crude Oil Is Trapped In A Bear Raid; Not Its Fundamentals [View article]

It means oil bulls are getting slaughtered as far as the eye can see. Kinda like a natural disaster that's ripped through a forest. However, our day will come. Most of the GASL trades mentioned in the article are now in the $3s. Patience is called for. I have trained myself to move into trades when an extreme in sentiment has been reached. Is it near the bottom for oil? A poetic comment like BlueIce's might mean it's closer, because it accurately expresses the intransigent despair of oil patch investors.

I think US gasoline prices have fallen for 110 days straight (a record). The trading in oil relative to its volatility and previous trends (10, 20, 50, 150, 200 day moving averages) is probably 4 standard deviations from normal. We are currently in the 1 or 2% of time-frames in which an oil-patch buy has moderate downside but an out-sized upside. Who's the last man standing? The one who has cash to buy. It's all probabilities at this point. I have been adding to GASL all day yesterday and today, and will add some more now, tripling-up on the $3.10 trade (11:30 AM, PST).

I have gone through this waiting game with the previous two trades I did in volatility, and in each case they reverted to the mean, and I was successful because I began at a point where reversion to the mean was likely to begin. It will happen here, too. The when? We don't know. That's why the dollar-cost averaging at lower and lower prices.

Crude Oil Is Trapped In A Bear Raid; Not Its Fundamentals [View article]

MerryGale,

You are welcome. Yes, the quality of some of the commentators is remarkable, including their personal education and the former role they might have played in the business world. Many simply chose to head-out on their own; and now share their methodologies and their skills with us.

I have heard that SA - as a compendium - is the largest independent source of research outside of Wall Street. What you might call "open-source" (available to all).

I particularly am interested in the practical aspects of making a successful trade - and then adding commentary once the trade is placed. Dollar-cost averaging and allowing TIME - the real muscle in investing - to do its work - is key. We can never quite know where the bottom is; but we can estimate if we are closer or farther away from it.

Take for example, the US natural gas market. Who could anticipate one of the warmest Decembers on record (after one of the coldest Novembers on record)? Natgas has now dropped 36% in a very short time. Can it continue to go where it has not gone for many a year? Of course.

But I think it is now more likely that the next big move is up, not down. But when? We don't know. Natural Gas is selling almost for less than it takes to produce it, pipe it, and ship it. Where's the business model in that? It's time to pull the horns in; shut some rigs down, and cool-out the supply.

That is why I have a growing interest in UPL, and tiny bait-drops in UGAZ at these levels. Yet Natgas seems to drop in free-fall each day, and in big gaps too. Buying quality energy stocks that have been sawed in half. That's what's happening this month.

Thank you. Yes, they are highly-leveraged but I read that they are getting a very high rate of return (est 57%?) on that recent 15% increase in leverage (borrowing to buy an asset swap from Shell Oil), thus the leverage was used to boost their proven and producing reserves (certainty) by about 25%.

Great article. What do you think of UPL, currently at 11 year lows? I read in an article that it's break-even for Natgas production was $2.86 MCFE, and Natgas is currently selling at $2.91. However, it's cost of production is estimated to be the second lowest in the industry, just above RICE at @$2.30. (See: http://bit.ly/1D8pnSA). Could be a lot of natgas rigs going quiet in the next 6 months. Your comments would be welcome.

Very well said. Do you have a position in UPL? This well-respected author (http://bit.ly/1D8pnSA) says its all-in costs for Natgas are $2.86 MCFE. That's second-lowest of all the drillers, and right about where the price of Natgas ($2.90) is now. He loved it at @ $26 in August. He must be even more favorable at $13.

What we have experienced in the oil patch - beginning in October through now - is similar to what the Financial sector in the US went through from October (2008) through March 9 (2009). Stocks at 50, 60, 70, even 80% discounts to what they were just a few months ago.

The trading action in the oil stocks in December has the same non-stop panic quality as the financial crash and the Nasdaq dotcom bust before it. I can remember Priceline for $7, AAPL for $5 (split adjusted), GE for $7, Dow chemical for $5, Ford for a $1.25 (I owned it), BAC for $2.50. Panic Panic everywhere. Anyone remember the solar stocks in 2012? SPWR at $3.

Long-term investors who waded-in amidst these panics did well back then (and that was not so long ago) and will likely will do well here. Dollar cost average into the best names you can find in the oil patch between now and March. That's only 60 days away.

I wrote previous articles about using the leveraged ETFs to do that, but their out-performance will only kick-in if the sector begins to streak in a single direction for a sustained amount of time. If we kick around down at these levels for 6 months to a year, the decay in the ETFs could be extensive.

Thus my new purchase in LINE. I remember LINE hitting these levels several years ago and regretting not buying it. With LINE you have both a monthly distribution and the chance for a capital gain. If you re-invest the distributions, it is even more appealing. A 50% cut in the dividend and it is still a good deal at these prices.

Crude Oil Is Trapped In A Bear Raid; Not Its Fundamentals [View article]

Yes, that's it exactly. You know, today might be an historic day. After the initial spike down (how many of those have we had these last 3 months?!) this morning, the OVX spiked, and then gave it all back. As a matter of fact, OVX volatility has been "giving it back" and receding for the last 2 days. If it breaks here below 50, the oil panic of 2014 may end on the last day of the year.